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80% tax on rezoned land compelling incentive to invest abroad

Under pressure to appease the envious,the antidevelopment Greens and those angered by NAMA,the government is in the final stages of applying a confiscatory 80% "windfall" tax to rezoned land as an amendment to NAMA legislation. As usual with socially envious taxation,we will cut off our nose to spite our face,deliberately it seems. If developers expect such a tax to last for several years or more,there surely will be very negative consequences for property development,which,whether we like it or not,is still one of the biggest industries and a major source of employment. In a recovering economy,shortages of developed land will become a major bottleneck to economic growth.

How will those shortages come about? Under Ireland's very strong constitutional property rights,there is an economic incentive to accumulate land slowly in landbanks to prevent a handful of stubborn holdouts from extracting exorbitant prices for the last few pieces of the jigsaw necessary to complete land acquisition programmes. Even if landbanks make big windfall gains,given their important function they should not be subjected to 80% confiscatory tax.Those envious of their profits ignore landbank windfall losses in recessions,which losses have been catastrophic to the biggest developers in the present recession/depression. As well,landbanks earn no income until land is sold,which can cause severe liquidity strains. Most landbanks and most farmers will refuse to sell,waiting patiently for a more rational approach to taxation.And who will want to invest in landbanks in the future?

The 80% tax gives a compelling incentive for landbank investors to invest abroad. This will have a similar effect to the incentive for commercial property developers to invest abroad when Finance Minister McCreevey raised the stamp duty on commercial property developments to an internationally high 8% to curb speculation. Billions in Irish financed property deals moved abroad.

Under pressure to appease the envious,the antidevelopment Greens and those angered by NAMA,the government is in the final stages of applying a confiscatory 80% "windfall" tax to rezoned land as an amendment to NAMA legislation. As usual with socially envious taxation,we will cut off our nose to spite our face,deliberately it seems. If developers expect such a tax to last for several years or more,there surely will be very negative consequences for property development,which,whether we like it or not,is still one of the biggest industries and a major source of employment. In a recovering economy,shortages of developed land will become a major bottleneck to economic growth.

How will those shortages come about? Under Ireland's very strong constitutional property rights,there is an economic incentive to accumulate land slowly in landbanks to prevent a handful of stubborn holdouts from extracting exorbitant prices for the last few pieces of the jigsaw necessary to complete land acquisition programmes. Even if landbanks make big windfall gains,given their important function they should not be subjected to 80% confiscatory tax.Those envious of their profits ignore landbank windfall losses in recessions,which losses have been catastrophic to the biggest developers in the present recession/depression. As well,landbanks earn no income until land is sold,which can cause severe liquidity strains. Most landbanks and most farmers will refuse to sell,waiting patiently for a more rational approach to taxation.And who will want to invest in landbanks in the future?

The 80% tax gives a compelling incentive for landbank investors to invest abroad. This will have a similar effect to the incentive for commercial property developers to invest abroad when Finance Minister McCreevey raised the stamp duty on commercial property developments to an internationally high 8% to curb speculation. Billions in Irish financed property deals moved abroad.

You are overlooking one tiny, teeny important piece of the puzzle: we have enough rezoned land to do us for the next 75 years. Buying landbanks is not economically productive, and is not 'investing'.

Landbanks key to development

You are overlooking one tiny, teeny important piece of the puzzle: we have enough rezoned land to do us for the next 75 years. Buying landbanks is not economically productive, and is not 'investing'.

Landbanks are critical to big commercial development projects. If landbank developers had to buy land in a hurry,as illustrated by the land purchase for the new prison to replace Mountjoy,the price of land would rocket by maybe 50 times or more. Maybe a constitutional amendment is needed to force owners of the last 30% of land necessary for a development to sell out.Of course,this could lead to developers creating developments for the sole purpose of grabbing land,as happens in the Costa Del Sol.

Also,rezoned land needs to have water and sewerage installed,often paid for by the landbank owner whose cash flow will be drained by the 80% tax.

Existing landowners will have a massive incentive to become property developers for legal tax avoidance through avoiding land sales,which will create unnecessary complications in tax laws and bring people into development who lack the skills for it.

90% tax?

Is it not an 80% tax on the increase in the value of the land arising from the rezoning of it ie it does not deal with the profits from whatever productive development activity is then carried on?

So developer buys land for 30, gets it rezoned so its worth 100, builds an office block costing say 50 and sells it for 200.

Right now (if via a company) Profit of 200 - 30 - 50 = 120 Tax at 12.5pc and company nets 105

Now Profit of 120 as before but 70 of the profit gets taxed at 80pc (56) and 50 @12.5% (6.25). Net is now 57.25.

Another way of looking at it (accepting as numbers change, so will effective rate) is that effective rate has gone from 12.5% to 52pc.

Will the effecient market now not make the uplift in value less over time.

You forget that the payout of dividends to shareholders paid from net profit is taxed at marginal tax rates of close to 50%,so if the land profit is taxed at 80% within a company,the tax including the dividend tax is now 80% + 50% of the remaining 20 paid out in dividends for a total tax of 80 + 10 = 90%. Business ceases to function with that kind of confiscatory tax.

Under pressure to appease the envious,the antidevelopment Greens and those angered by NAMA,the government is in the final stages of applying a confiscatory 80% "windfall" tax to rezoned land as an amendment to NAMA legislation. As usual with socially envious taxation,we will cut off our nose to spite our face,deliberately it seems. If developers expect such a tax to last for several years or more,there surely will be very negative consequences for property development,which,whether we like it or not,is still one of the biggest industries and a major source of employment. In a recovering economy,shortages of developed land will become a major bottleneck to economic growth.

How will those shortages come about? Under Ireland's very strong constitutional property rights,there is an economic incentive to accumulate land slowly in landbanks to prevent a handful of stubborn holdouts from extracting exorbitant prices for the last few pieces of the jigsaw necessary to complete land acquisition programmes. Even if landbanks make big windfall gains,given their important function they should not be subjected to 80% confiscatory tax.Those envious of their profits ignore landbank windfall losses in recessions,which losses have been catastrophic to the biggest developers in the present recession/depression. As well,landbanks earn no income until land is sold,which can cause severe liquidity strains. Most landbanks and most farmers will refuse to sell,waiting patiently for a more rational approach to taxation.And who will want to invest in landbanks in the future?

The 80% tax gives a compelling incentive for landbank investors to invest abroad. This will have a similar effect to the incentive for commercial property developers to invest abroad when Finance Minister McCreevey raised the stamp duty on commercial property developments to an internationally high 8% to curb speculation. Billions in Irish financed property deals moved abroad.

Could you make that 90% - just to be sure that their next round of investment/speculation/gambling is done somewhere else

Could you make that 90% - just to be sure that their next round of investment/speculation/gambling is done somewhere else

It may be 90% if there is an 80% tax within a company followed by marginal tax of around 50% on the dividend paid out to shareholders in their personal tax returns. (80 + 50% dividend tax on the remaining 20 = tax on 90 on 100 profit.)

Obviously,your job doesn't depend on development and construction,so you can indulge your envy of developers.